These 4 Measures Indicate That SA Catana Group (EPA:CATG) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, SA Catana Group (EPA:CATG) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SA Catana Group

What Is SA Catana Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of August 2020 SA Catana Group had €26.5m of debt, an increase on €2.75m, over one year. But on the other hand it also has €35.0m in cash, leading to a €8.52m net cash position.

A Look At SA Catana Group's Liabilities

We can see from the most recent balance sheet that SA Catana Group had liabilities of €34.0m falling due within a year, and liabilities of €26.6m due beyond that. Offsetting these obligations, it had cash of €35.0m as well as receivables valued at €14.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €11.5m.

Of course, SA Catana Group has a market capitalization of €106.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, SA Catana Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that SA Catana Group has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SA Catana Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SA Catana Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, SA Catana Group's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While SA Catana Group does have more liabilities than liquid assets, it also has net cash of €8.52m. So we don't have any problem with SA Catana Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - SA Catana Group has 3 warning signs we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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